Sun Group to build housing in Russia

May 30 2011

Nikolay Mikhalev

Source: Kommersant

The Russian real estate
market seems to have completely recovered from the economic crisis and has
become appealing to prudent institutional investors who were reluctant to
invest in construction even before the economic crisis. India’s Sun Group, known
in Russia for its energy, mining, and beer brewing projects, intends to develop
affordable housing and commercial real estate here. The company is already
looking for two partners from among the Moscow region’s leading developers.

Sun Group announced plans to
invest in Russian real estate at the Real Vienna-2011 real estate exhibition in
the Austrian capital. Sun Group intends to establish a private equity fund to
invest in Russian real estate; the amount of investment will be determined
within a year, a company spokesman announced at the Russia–Europe. A Reset round table. Sun Group’s partners in the United
States, Europe, the Middle East and China have been invited to participate in
the fund. According to the company’s spokesman, its $630 million SUN-Apollo
India Real Estate Fund has already been up and running in India.

In Russia, Sun Group intends
to invest in entry-level high-rises and retail space. While its affordable
housing will be limited to the capital region, plans for retail include
expansion into other regions as well, provided the partner developer secures
contracts with anchor tenants.

The Indians are now selecting
Russian development partners. Sun Group wants to establish two joint ventures,
one for housing and another for retail. Each of the JVs will include Sun Group and
its partners on the one hand, and a Russian developer who will contribute
project-ready land on the other.

After testing the selected
local developer in a specific project, Sun Group will be ready to work with
them on other projects by acquiring and developing new lots. Housing
construction volumes are projected at anywhere between 200,000 and 300,000
square metres. Investors are expected to contribute 30 – 40% of the required
investment for each project. For example, Sun Group and its financial partners
could invest in the range of $10 – 40 million in any given housing project,
with the rest coming from borrowings.

The company is now in the
process of selecting “the right development products” to offer foreign
investors. These include a 190,000-square metre affordable housing project in
the Greater Moscow Area. Sun Group has declined to disclose the location or the
developer, saying only that it’s a major affordable housing developer in the regional
of the capital.

The Sun Group spokesman
claims that Russian housing developers earn up to 80% margins, while foreign
investors would be happy with 30 – 35%. The CFO of a large real estate
developer countered that such margins are unrealistic. He believes the Indians
are using pre-economic crisis data that are no longer relevant. He told RBC
Daily that developers currently earn margins of 10 – 12%, in line with bank
lending interest rates.